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Wednesday, March 28, 2012

Unable to hold, exiting early III - Recent losses

One of the most difficult tasks a trader faces is to not let recent outcomes impact their current decisions. For example, a trader who may have sold b3 and bought b5 and lost both trades may have also entered a short below b8. However, instead of letting it run, he may be tempted to take a quick profit and exit his position completely. This is mainly because the two very recent losses have impacted his emotions and judgements pretty intensely even though he may not realize it consciously. The human survival mechanism kicks in and forces the trader to get out at a small, certain profit and be closer to flat for the day rather than risk making the loss larger.

It is very hard to overcome this emotional impact and start with a clean slate so to speak since there is insufficient time for the trader to calm down and regain composure. The way I address this is to avoid trading for at least two swings or wait for the price to move away from the area where you had your loss.

Not trading for a couple of swings protects you from going into tilt mode. Not trading around the same price protects you from choppy action. If you took a decent looking signal and were stopped out, there is a very good chance you are in some choppy waters and should expect to be stopped out again. Letting the price move away allows some time to pass and is likely to give you a better setup for the next trade.

2 comments:

Hello Cad! So appreciate ALL the trading insights that you have posted. I have read ALL 3 of Al Brooks books....but still am struggling....and your site is a Godsend to me! I have a problem with early exits even with only 1 loss, and even in a strong trend. You state in "The Traders Mind IX the consistent trader", the after a trader has entered his judgement is weakest, yet he "uses mathematics to ensure that his odds of reaching a profit are higher than his odds of being stopped out"....therefore, in my case, after entering a good setup, in order to remain in the trade, should I be telling myself "the odds are better than 50% in this trade, I should stay in as long as the price action stays in my favor"?

In my early trading days, I would enter, panic when price moved against me, exit, then curse myself when the price moved back in my original direction and buy market due to fear of missing out.

This terrible emotional roller-coaster is very familiar to every trader. So the first thing I needed to do was accept the result of my trades, good or bad.

So I started to use fixed stops and exits. The win-rate will not be high, but you are not trying to make money at this point, just trying to get used to choosing the right trades. Do not try to manage the trade other than tightening stops. To do this successfully, the stop has to be very small simply because psychologically its hard to sit by when the price moves against you when your stop is large.

That's what stops represent. Your comfort level in how much the price can move against you. The tighter the stop, the more mistakes you can make and more you can learn.

Eventually, you will learn what is an acceptable stop for your trades or (as I have done) only accept setups where stops can be tight.